Alcoa Corporation (AA) Earnings Call Transcript & Summary

All right. Good. I guess, late morning, everybody. Thank you for attending here the Jefferies Industrial Conference. We have Alcoa Corporation CFO, Molly Beerman. Alcoa is a global producer of aluminum, alumina and bauxite. And I think Molly has some just opening prepared remarks, and then we'll get into some Q&A here.

So welcome, everyone. Thanks for your time and interest to those in the room and those joining online. An exciting time for Alcoa. We are approaching our 10-year anniversary as a stand-alone company and a lot going on. We're carrying great momentum from the second quarter into the third. Second quarter we saw strong production, strong realization of prices dropping to the bottom line, stability throughout the portfolio. We hit production records in 5 of our operations and, again, continuing that into the third quarter. We also are making the most of strong market fundamentals. We serve customers, primarily in North America and Europe, where the demand has remained strong. Customers are actively looking for our supply because they're looking for alternatives to the uncertainty with the Middle East supply. And third, we announced an acquisition, the largest in our company's history of South32's alumina bauxite alumina and aluminum assets transaction we call Eli Group. We are on track to close that transaction in the second half of '27. So lots going on and open to all your questions, Albert.

Thank you for that, Molly. So I guess maybe we'll start higher level on maybe the more macro front with just the alumina and aluminum markets. a lot of moving parts. You mentioned the war in the Middle East, obviously, a good amount or maybe 10-ish percent of global supply has come from the Middle East in recent years. Maybe production impact and being impacted there has impacted some of the global alumina supply-demand dynamics. So just what you're kind of seeing high level in each of those markets on the global front and then maybe we'll get into regional premiums a little bit later.

So in alumina, we still see the market in surplus. You've seen some price rebound recently getting to about that 350 level. There was some disruption at Alionorte, which initially brought the price up. However, we're also seeing we're approaching the date with the RON curtailment. So that will be taking 40% of that supply out that's announced for October. You're also seeing sentiment about the Middle East smelters increasingly consuming alumina. So a little bit more supply control, demand pickup, but alumina as a whole is still in surplus and expected to remain so for the rest of this year and probably into next year until the Indonesian smelter start to come online and consume more of the alumina. In aluminum, we are still in a global deficit again, with the Middle East out for Alcoa, this is showing up as a very strong demand. As I mentioned in opening comments from our North American and European customers. They are preferring supply that's regionally located. You see that showing up in the Midwest premium as well as the Rotterdam premium competition 4 tons. Now units are still available. But from our value-add perspective, our order book is almost completely sold out for the rest of '26 and we're heading into the '27 contracting season on a good basis to secure good premiums into '27.

So I definitely want to go to maybe some of those regional premiums and how the tariffs have impacted that and maybe some of the headlines on recent tariff changes. But I guess, broader so in the aluminum industry, do you think we're -- and it looks like is the case board continuing to move to maybe a developed economy aluminum market in North America, maybe Europe, some of the regions you play in and then maybe kind of like rest of world where China and some of the growth in Southeast Asia like Indonesia would more so play?

I'm sorry, the question is?

I guess are you seeing continued trends into kind of like a divergence like between China, Southeast Asia other global aluminum supply and then North America and Europe. I assume as time goes on, you're seeing more divergence between those 2 markets, right?

Yes. We do see in aluminum a divergence in the market because China is largely self-sufficient. They have been exporting a small amount yet, but that's not material to the global market. So ex-China, the markets are again, overall, in deficit with North America and Europe at the greatest levels of deficit.

Okay. And then I guess, moving to some of the recent tariff headlines. Obviously, you mentioned the Midwest premium. I think you guys have talked about how you're a net beneficiary of that. But maybe just speak on a lot of your production is in Canada or a good amount of it is and some of the recent headlines of maybe reducing Canadian tariffs to 25% into the U.S. on steel and aluminum. How would that impact your business? I mean I would assume maybe that would impact the Midwest premium, but -- maybe you could talk about how you would be maybe a net beneficiary or how that would overall impact the business?

Alcoa is in a fortunate and unique position and that we can benefit almost from any of the trade proposals that are currently open. Even in the current environment with a 50% tariff, we have CAD 900,000 tons. The majority of that is coming into the U.S. We're paying a tariff that's over $1 billion. However, the Midwest is fully compensating for us for that as well as returning a margin because of the tightness in the tons. . If we were to receive a favorable tariff rate on Canada, think of that $1 billion in tariff being cut in half. So there will be a major benefit to Alcoa. So a favorable rate for Canada works in our favor. Some of the proposals even had a quota rate that would also be favorable to us. We have a good history of supplying Canadian metal into the U.S. So we are well positioned for whatever the trade negotiations land on.

And we've kind of talked in our research where -- and I think most of the market would agree that maybe more so on the steel side, but steel and aluminum, it seems like the administration is kind of treating them the same with respect to tariff policy that Canada and Mexico would eventually kind of get some type of exemption whether that's a reduction to 25%, whether that's some type of quota system, just given how intertwined those kind of metal industries have become since Trump originally gave them free trade. I guess what we've talked about is maybe the risk that this could expand to other trading partners, right, in Europe and Southeast Asia. So how would your business be impacted if we start to see tariff reductions coming from Japan or South Korea or Europe, things of that nature?

So the U.S. needs to import 4 million metric tons of supply. Canada only has the possibility to supply about 3 million of that. If additional trade partners get tariff relief or waivers and the last 1 million metric tons is covered, then you can expect Midwest premium to reduce in response to essentially wipe out the tariff benefit. But with the U.S. still needing to incent the import of 1 million tons, even if we were to have a favorable rate with Canada, we don't see Midwest dropping significantly. It might come off a little bit, but we wouldn't see it returning to pre-tariff levels.

Got it. So kind of a longer-term structural higher Midwest premium. And I think that's kind of the message we've heard from some other producers even in maybe the recycled aluminum space. Moving on from maybe macro again, if there's any questions in the audience, feel free to just raise your hand, and we'll bring you over a mic. But I guess moving more specifically into some of the initiatives at Alcoa, you mentioned some of the drivers of Alcoa's Q2 EBITDA improvement. Just wondering if maybe you could expand on that a little bit, the operational enhancements you believe that are positioning the business to perform through the cycle.

With a very strong second quarter, really took advantage of the high prices and getting those to the bottom line. over $900 million. Included in that is not just a price story. We made operational improvements. We brought about 30,000 metric tons of smelting capacity back online. So we had ramp-ups at our San Ciprian smelter in Spain, Alumar in Brazil, Lista in Norway and Portland and Australia. So all of those sites bring on any pots that have been idle trying to take advantage of the high pricing. We also moved production out of prime metal and into our value-add products, about 25,000 tons additional VAP production in the second quarter. We get the higher margin on those. So we love selling that instead of the prime metal. So sustainable improvements that we expect to carry into the third quarter.

And that's kind of something that will help kind of reduce the earnings volatility going forward, right? I think most in the market maybe expect some downside to aluminum prices just with the resolution of the war, maybe not so us as we think kind of the longer-term base metal kind of demand growth with copper as well. But so those operational improvements would obviously help improve through cycle earnings, right?

Yes, absolutely. The production, the flexibility in our cast tales, we can adapt to the market movements and customer requirements.

So I guess on some of those operational improvements, obviously, you guys have recently announced kind of a transformative acquisition with the South32 aluminum and alumina assets. I guess maybe if you could walk us through your strategic thinking there and maybe how these assets would compete for capital with the rest of the business, right? Is there a certain amount of capital you expect to deploy to these assets to maybe get them up to the Alcoa operating standard. And would that defer some of the CapEx across the rest of the profile that you had slated for maybe operational improvements?

So when you step back and look at the Ali Group acquisition, we are acquiring assets of the type that we're already very familiar with. This is a great fit. We're purchasing a mine and refinery in Western Australia. They are located right next to our current operations. We're buying out the minority interest in our Alimar smelter and refinery in Brazil. Again, assets that we're very familiar with. We're buying Hillside smelter in South Africa. That's running technology. That's the same as the technology that we're running in 2 of our smelters. So it's a very logical grouping of assets in terms of fit and ability to leverage our expertise in those assets. That's giving us scale. Will make us more resilient throughout all the market cycles. The profile of the asset is high in cash generation that will give us additional financial flexibility. The acquisition is also moving us down on the cost curve. We're bringing in assets that are slightly better positioned than Alcoa assets, so we'll be more competitive from that perspective as well. We have synergies, also expectations. I talked about the like assets and deploying our expertise across the newly acquired assets, we expect to get notable synergies to create shareholder value as well. Let me -- I can't address your CapEx question, sorry about that. As we went through due diligence and looking at these assets, we were able to make a great assessment about the quality of the assets love meeting the team's very strong operating teams look forward to welcoming them into the Alcoa family. As we did the evaluation of CapEx needs, these are not assets that have been deprived of capital. They're well functioning, value accretive immediately. We anticipate increasing our CapEx spend about $350 million to $450 million per year with these assets. That's on top of Alcoa's outlook for CapEx, which this year is $750 million. So we expect to fully support their operating plans and their CapEx needs, the projects that they have underway today as well as their future plans, but this is not a group of assets that needs any catch-up capital. They're well structured.

Okay. And I guess, at the Investor Day in December when you guys have maybe announced some of that elevated CapEx in the years ahead. The acquisition of the South32 assets wouldn't impact that at all, right? You'd be able to manage maybe the maintenance CapEx with the South32 assets to your point, they don't need incremental maybe growth CapEx, but while also deploying the additional CapEx you had previously guided to?

Yes, we had guided to $750 million for this year and then $800 million for the next 3 years. and then stepping back down to 750. And we go up in the next years because we're planning mine moves on the Alcoa assets. So our Western Australian mines will be moving over this time period. We also have residue storage area work to do, and we're making some investment in bake furnaces at the same time as well across our portfolio. But then we'll step back down to the 750 level.

And I think you made a good point earlier where you highlighted the synergies. And I think that's a response into maybe what some might think, hey, is this an acquisition just to grow, right, growth for the sake of growth, but there's clear synergies here, who would you be able to outline maybe on some of those synergies and maybe reiterate your expectation on some of the timing of the realization of these synergies?

Sure. So we've estimated and announced in announcing the transaction that we have $900 million of net present value synergies to realize. And we think of those in 3 groupings. The first is more near term, and that comes from the benefits from procurement, logistics and commercial synergies. So think of those as combining the best of both in terms of raw material supply contracts, indirect contracts, logistics. We both are operating rails, ports, warehouses, facilities, there's many opportunities there. And then in commercial, we'll be able to absorb their sales right within our teams and start to use our practices for direct outreach to end customers. That near-term grouping of synergies, we put an initial value at $50 million per year for that, and we'll get that within the first 12 months of close. If you think about that on an NPV basis, that's about 30% of the $900 million in synergies. And that will be, again, starting to realize that immediately. The second group of synergies are process technology, and these will start in 2 to 3 years. So this is taking our operating expertise into the South32 assets. At Worsley, they've held production fairly flat over the last period of time. If you look at our refineries, we continue to add production year-over-year-over-year, not necessarily with massive CapEx projects, it's more about disciplined incremental growth using our best practice coming out of our COE. We will do the same at Hillside. It's kind of the same story. They haven't had the massive smelting experience, so Hillside has remained relatively flat, where our smelters using that same technology have been able to incrementally add each year. So that's the second piece of synergies. And then the last piece of synergies, and this is the biggest is the life of asset planning for the mines in Western Australia. So the mine leases sit right next to each other. And if you think about it, the refineries are running in a row, north south down that mine lease. Today, we're trying to map all of the mines to get the ore to the refinery that makes the most economic sense. When we now have 3 refineries and 2 mines sitting next to each other, we'll rework the entire mine plan. We will be able to avoid or defer mine moves. Each mine move is hundreds of millions of dollars. So if you think about this over the 20 to 40 years life of a mine, it's massive amounts of savings. So we look at that, we NPV it back to today's dollars that's 40% of the $900 million that we'll get through the rework of the mine plans.